07/07/2014

Insights on Doing Business at the Base of the Pyramid

Johnson’s Mark Milstein shares lessons learned at Social Innovation Summit at the United Nations in New York City

Many companies that hoped to cash in by selling products to the untapped market of the world's poor have found that targeting the so-called base of the pyramid (BoP) presents unique challenges that must be overcome before they can earn a profit.

"Companies came into this space with the expectation that the opportunities would be very big and the financial rewards would be quick, but it's much more complicated than that," Milstein said. "You're talking about organizations that are trying to understand the needs and behaviors of a consumer demographic that they're not familiar with in places where they don't normally do business. That’s a lot of unknowns."

The idea of opening new markets among the world's poor was popularized by the book, The Fortune at the Bottom of the Pyramid, by CK Prahalad, which was published in 2004 and followed an earlier article by Prahalad and Stuart Hart, Johnson professor emeritus. In the decade that followed, businesses began creating products and services to meet the needs of impoverished populations with mixed success.

"The original idea was that companies could sell things at cheap prices with low margins, but they would make up for those low margins with high sales volumes," Milstein said. "That presented two problems. First, the volume sales often never materialized as expected. Second, the margins didn’t cover the fixed costs involved in operating the business, so many ventures were not profitable."

As a result, companies were forced to subsidize their base of the pyramid activities philanthropically or to shut them down entirely, he said.

At the summit, Milstein participated on a panel focused on the experiences of companies that have attempted to build businesses at the base of the pyramid over the past decade. The panel, sponsored by The Guardian, was organized and moderated by Marc Gunther, a well-known journalist in the field.

In addition to Milstein, the panel included representatives from SABMiller, which has developed specialized beers from unique local crops, thereby supporting local agricultural supply chains; CleanStar Ventures, which has developed clean-fuel cook stoves to improve health and the environment; and SC Johnson, which has worked on a number of BoP ventures, including development of new products and businesses meant to alleviate malaria.

While these companies have been successful, they have also faced struggles in their ventures. "Many firms have learned that the aspirational vision of developing a BoP business is not the same as empirical evidence. But the idea still holds promise." Milstein said, "The private sector can make a unique contribution by developing competitive, profitable new markets, products, and services that address the needs of the poor. To do so effectively, though, companies have to apply business fundamentals to their efforts and move forward in a much more deliberative way."